by Zubin Driver
February 03, 2010
After two weeks of sharp corrective activity on global exchanges, use of the term 'up here' may surprise some. Yet markets are still over 50% above last year's lows in most cases, a recovery level that very few would have predicted at the height of panic during the crisis. The last two weeks have seen the bear turn away a strong round of earnings; suddenly, uncertainties that were brushed aside by the rally's powerful momentum, have eclipsed the good news and swept to the forefront of market sentiment.
While some companies did not deliver strong numbers, many did, including a number of leaders such as Apple. On Friday, US GDP numbers came in strong, up 5.7% (annualised) in Q4 2009. Like so many days of late, trading action was cruel: futures pointed optimistically upward before the opening bell, yet the open was lacklustre, and gave way to a sell off into the close. This type of trading characterises markets in down phases, and has started to look the opposite of action during the rally, during which negative action was consistently reversing to the upside.
Has the economic story changed significantly from what it was during the rally? No it has not. Yet some of the eventualities that occupied the horizon's edge have now moved to the foreground. Deficits are unsustainable; stimulus spending needs to be curtailed; structural spending on health and pensions is expanding; growth should be limp, unemployment remains high. China, engine of global recovery, has threatened prudence by restricting lending and raising banks' reserve requirements, flexing its muscles to the dismay of we who ride the China growth story ad infinitum. In fact, this correction, whose dynamic, as stated above, has been defined by stillborn rallies on good news that fizzle into selloffs, began with China's announcement of massive GDP and trade numbers for Q4 2009. That morning, Monday January 11, saw the TSX spike above 12,000 briefly before selling off the rest of the day. Two weeks later, the TSX touched a low of 11,094.
On the plus side, catastrophe has been averted, and economies are firmer than they were during the crisis' climax. Financial institutions have recapitalised, government sponsored liquidity remains in place, companies have returned to profit, and economies to growth. Most importantly, confidence has improved. Perhaps the biggest risk to stability, and an environment that nurtures and rewards achievers, is extremism. During the crash markets plummeted, sending net worths to ruin; the recovery skyrocketed, lifting ruin back to riches ahead of schedule; a healthy correction may return equilibrium, and a more realistic view of the mixed economic picture that lies ahead.
Barack's Growing Pains
More than once during the past week, while speaking to others about the markets, I've heard people say that 'all was going just fine until Obama started talking about taxing the banks!' Indeed, the US president has been discussing measures to impose some form of levy on undercapitalised banks, and to curb or shut down proprietary trading, the practice in which financial institutions trade on behalf of their own accounts.
More importantly, as the president's first year has come to a close, he has just lost a crucial senate race in Massachusetts in a seat that was held by Edward (Ted) Kennedy for 45 years. This loss has removed the Democratic super-majority in the senate, by which the Democrats had enough votes to shut down debate and guarantee bill passage. Undoubtedly, the loss cannot be downplayed, especially in its implications as a gauge of Obama's dramatic fall in support levels, which had ridden high on his promises of change and a 'new politics' of bipartisan cooperation. The last year will prove a lesson to the President on managing expectations, including his own.
President Obama stands at a crossroads. Down one road, markets are spooked as they see a novice Chief Executive making populist threats to capitalism, banking reform being an example. Yet Obama's concept on said reforms is not purely misguided: the banks rode free capitalism to toxic heights; their fall threatened the entire economy until Big Government bailed them out. If they cannot manage their own risk, and taxpayers must pay for their mismanagement, as has been proven by the crisis to have been the case, regulation becomes the logical outcome.
Yet what form will the regulation take? This question makes reference to Obama's opportunity, to work pragmatically from the center. If he proposes regulations that are moderate and accept Republican input, he may be able to put a package in place that doesn't alienate the other side. The same will be true of a number of other issues, including his health care bill.
The risk is also there that, with the senate seat loss, and the congressional vote coming in the fall, that Obama's Democrats will be paralysed, unable to push bills through Republican opposition. When the Democrats lost Kennedy's senate seat, markets' slide accelerated, likely due to the possibility that American politics could be in for a grinding stalemate in which the ability to pass legislation is significantly reduced. Thus, Obama will need to turn the loss into opportunity, using it to put his politics of compromise to use, in a political climate that has unfortunately been accelerating to the partisan side.
Best regards,
Zubin
Zubin Driver
Investment Advisor
(W) 604 643-7608 / (F) 604 643-7606
Email: zubin_driver@canaccord.com
Canaccord Wealth Management
Attention: Zubin Driver
P.O. Box 10337 Pacific Centre
2200 - 609 Granville St.
Vancouver, B.C. V7Y 1H2
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